IMA moves to address regulator’s outsourcing concerns

The Investment Management Association has responded to the financial regulator’s concerns over asset management houses’ use of outsourcing to third parties.

In a ‘Dear CEO’ letter in December 2012, the Financial Services Authority asked asset managers to examine their contingency plans for their middle and back-office functions if their outsourcing provider was to get into difficulties.

The FSA, which has since been succeeded by the Financial Conduct Authority, expressed concern that the move towards outsourcing has left asset managers reliant on a small set of providers, many of whom are “part of complex international banking groups”.

These concerns centre on the fact that if a service provider were to fail, their relevant functions would not be able to be transferred to another party in time for service to return to normal in a timely fashion. The events of the financial crisis, which saw a number of banking groups collapse, heighten this risk.

A new white paper by the IMA says: “It is fair to say that a significant portion of the industry has recognised that these concerns have a legitimate basis, with the IMA forming a working group to consider the issues and commissioning this white paper.

“To the regulator’s credit, it has also expressed a keen desire to engage with the industry to consider what is possible and practicable, without damaging the competitiveness of the UK asset management industry or adopting a disproportionate approach.”

The IMA has published “a suite of ideas” in the paper following a consultation within its member working group. These include ensure “robust” business continuity arrangements are in place at service providers, regular “testing” of the arrangement to identify any weaknesses and the need for exit planning by both parties.

In addition, the white paper includes a number of ideas for the industry to consider further. The IMA adds that the publication of the paper should not be seen as the “final step” and plans to form a small group of asset managers to examine some of the issues in detail.

“A number of asset managers have already started to review and action some of the key points highlighted in this paper, but the industry also awaits the outcome of the FCA’s analysis and work in this area,” the document says.

“It is hoped this will contain a clear statement of the regulator’s expectations as to specific next steps it wishes for both individual firms and the industry generally to take.”